Firm Dynamics in Developing Countries 1

Firm Dynamics in Developing Countries 1 Ufuk Akcigit University of Chicago & NBER Conference on Economic Growth - July 10, 2015 1 Based on a joint work with Harun Alp (UPenn) and Michael Peters (Yale) Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 1

Background Understanding the growth process requires a good understanding of micro players (firms & entrepreneurs) of the macroeconomy. Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 2

Background Understanding the growth process requires a good understanding of micro players (firms & entrepreneurs) of the macroeconomy. Going from micro-to-macro is crucial. Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 2

Background Understanding the growth process requires a good understanding of micro players (firms & entrepreneurs) of the macroeconomy. Going from micro-to-macro is crucial. The back-and-forth dialogue between data and theory is important. Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 2

What is Our Research Approach? Start with empirical regularities in the micro data. Motivated by those regularities, construct a general equilibrium theory of firm dynamics and aggregate growth. Estimate the structural parameters of the model using micro-level data. Conduct counterfactual experiments. Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 3

Motivation Recent literature: Firm dynamics in poor countries show striking differences to those of rich countries Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 4

Hsieh and Klenow (2014) Figure 1: Plant Employment by Age in the Cross Section 8 Employment (Age < 5=1) 4 2 1 US India Mexico 1/2 <5 5-9 10-14 15-19 20-24 25-29 30-34 35-39 >=40 Sources: 1994 1995 ASI NSS (India), 2003 Economic Census (Mexico), and 2002 Manufacturing Census (U.S.). Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 5 Age

Hsieh and Klenow (2014) Figure 1: Plant Employment by Age in the Cross Section 8 Employment (Age < 5=1) 4 2 1 US India Mexico 1/2 <5 5-9 10-14 15-19 20-24 25-29 30-34 35-39 >=40 Sources: 1994 1995 ASI NSS (India), 2003 Economic Census (Mexico), and 2002 Manufacturing Census (U.S.). Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 5 Age

Mean Employment The expanding firms in India While the average life-cycle is flat, some Indian firms manage to grow: 3.5 3 2.5 2 1.5 1 Mean 95% Confidence Interval <5 6-10 11-15 16-20 21-25 26-30 31-35 36-40 40> Age Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 6

Share of Establishments The stagnant firms in India Extra... but aggregate importance of tiny producers stays stubbornly high 1 0.8 0.6 0.4 0.2 0 0-5 6-10 11-15 16-20 21-25 26+ Age India Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 7

Selection in the US vs India Many small firms exist in the US as well...... but they do not matter as much and exit quickly Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 8

Share of Establishments Selection in the US vs India SHARE OF SMALL ESTABLISHMENTS (COUNT) 1.2 1 0.8 0.6 0.4 0.2 0 India US 0-5 6-10 11-15 16-20 21-25 26+ Age Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 8

Motivation: Entrepreneurial Selection There are two types of entrepreneurs in the data: Schoar (2010), Hurst and Pugsley (2012), Decker, Haltiwanger, Jarmin and Miranda (2014) Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 9

Motivation: Entrepreneurial Selection There are two types of entrepreneurs in the data: Schoar (2010), Hurst and Pugsley (2012), Decker, Haltiwanger, Jarmin and Miranda (2014) Subsistence entrepreneurs: No intention to grow Want to keep the business within the family. Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 9

Motivation: Entrepreneurial Selection There are two types of entrepreneurs in the data: Schoar (2010), Hurst and Pugsley (2012), Decker, Haltiwanger, Jarmin and Miranda (2014) Subsistence entrepreneurs: No intention to grow Want to keep the business within the family. Transformative entrepreneurs: Create businesses with the intention to innovate and grow Create employment for other workers and value added for the economy. Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 9

Firm Dynamics in Developing Countries Why are transformative entrepreneurs not growing in India? Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 10

Firm Dynamics in Developing Countries Why are transformative entrepreneurs not growing in India? Credit constraints? Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 10

Figure 3: Average Pro Firm Dynamics invalue-added/capital Developing Countries value-ad 1.8 1.5 1.2 1.8.9 1.5.6 1.2.3.9 0.6.3 0 value-added/capital value-add India ( 1 2 3 4 5 6 DATA SOURCE: HSIEH AND OLKEN (2014) 1 2 3 4 5 6 3 2.5 2 1.5 3 2.51 2.5 1.50 1.5 0 India (2 1 2 1 2 3 Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 10

Firm Dynamics in Developing Countries Why are transformative entrepreneurs not growing in India? Credit constraints? Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 10

Firm Dynamics in Developing Countries Why are transformative entrepreneurs not growing in India? Credit constraints? Size-dependent Policies? Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 10

Firm Dynamics in Developing Countries Labor market regulations at 100 employees. 0 20 40 60 80 100 0 < Employment < 200 0 50 100 150 200 Employment 0 20 40 60 80 10 < Employment < 200 0 50 100 150 200 Employment 0 10 20 30 40 20 < Employment < 200 0 50 100 150 200 Employment 0 5 10 15 20 50 < Employment < 200 50 100 150 200 Employment DATA SOURCE: AKCIGIT, ALP, PETERS (2014) Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 10

Firm Dynamics in Developing Countries Why are transformative entrepreneurs not growing in India? Credit constraints? Size-dependent Policies? Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 10

Firm Dynamics in Developing Countries Why are transformative entrepreneurs not growing in India? Credit constraints? Size-dependent Policies? An interesting fact: The best predictor of firm size in India is... vs. Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 10

Firm Dynamics in Developing Countries FAMILY SIZE! Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 11

Firm Dynamics in Developing Countries MAJOR OBSTACLE TO FIRM GROWTH: LACK OF DELEGATION Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 11

Stylized Facts from Bloom & Van Reenen et al. s Work Micro-evidence: Limits to managerial delegation important for firm performance in developing countries SDP CC Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 12

Stylized Facts from Bloom & Van Reenen et al. s Work Micro-evidence: Limits to managerial delegation important for firm performance in developing countries - Outside managers misappropriate assets due to weak rule of law. SDP CC Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 12

Stylized Facts from Bloom & Van Reenen et al. s Work Micro-evidence: Limits to managerial delegation important for firm performance in developing countries - Outside managers misappropriate assets due to weak rule of law. - Span of control of the owner is a binding constraint in developing countries. SDP CC Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 12

Stylized Facts from Bloom & Van Reenen et al. s Work Micro-evidence: Limits to managerial delegation important for firm performance in developing countries - Outside managers misappropriate assets due to weak rule of law. - Span of control of the owner is a binding constraint in developing countries. - Family size is one of the best predictors of firm size in India. SDP CC Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 12

Stylized Facts from Bloom & Van Reenen et al. s Work Micro-evidence: Limits to managerial delegation important for firm performance in developing countries - Outside managers misappropriate assets due to weak rule of law. - Span of control of the owner is a binding constraint in developing countries. - Family size is one of the best predictors of firm size in India. Implication: Limits on managerial time reduce competition so that unproductive firms survive (lack of selection). SDP CC Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 12

Lack of Delegation is a Major Problem P Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 13

This paper Research Question: How much of the observed differences across countries can be explained by the lack to delegation? Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 14

MODEL Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 15

The Model Economy quality level q sector j 0 1 US Economy Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 16

The Model Economy quality level q sector j 0 1 GDP = Sectors combined Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 17

Sector-specific Productivities quality level q sector j 0 1 Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 18

Example of a Firm quality level q sector j 0 1 Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 19

Example of another Firm quality level q sector j 0 1 Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 20

Productivity Growth: External R&D quality level q sector j 0 1 External R&D Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 21

Productivity Growth: External R&D quality level q sector j 0 1 External R&D Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 22

Reallocation is Taking Place... quality level q sector j 0 1 External R&D Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 23

Competition Creates Selection quality level q sector j 0 1 External R&D Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 24

Eventually Some Firms Exit quality level q sector j 0 1 External R&D Exit Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 25

In the Meantime... quality level q sector j 0 1 Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 26

Some New Entrants Show Up quality level q new entrants sector j 0 1 Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 27

And New Entrants Replace Incumbents quality level q sector j 0 1 Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 28

Model Details Production requires managerial time. Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 29

Model Details Production requires managerial time. The owner can run the company by herself. But she has limited amount of time and therefore runs into span of control problem. Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 29

Model Details V(n) V self (n) 0 # of product lines, n Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 29

Model Details Production requires managerial time. The owner can run the company by herself. But she has limited amount of time and therefore runs into span of control problem. Or the owner can decide to hire outside managers. Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 29

Model Details Production requires managerial time. The owner can run the company by herself. But she has limited amount of time and therefore runs into span of control problem. Or the owner can decide to hire outside managers. Managers might steal. Owner has to monitor. Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 29

Model Details Production requires managerial time. The owner can run the company by herself. But she has limited amount of time and therefore runs into span of control problem. Or the owner can decide to hire outside managers. Managers might steal. Owner has to monitor. Then the net benefit is ξ c = manager s human capital monitoring time ξ c : Country-specific delegation benefit. Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 29

Value Function as delegation (ξ) gets easier V(n) V self (n) 0 # of product lines, n Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 30

Value Function as delegation (ξ) gets easier V(n) V manager (n) V self (n) 0 n*(ξ L ) # of product lines, n Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 30

Value Function as delegation (ξ) gets easier V(n) V manager (n) V self (n) n*(ξ # of product lines, n 0 L ) Remark: Delegation is crucial to fight decreasing returns. Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 30

Value Function as delegation (ξ) gets easier V(n) V manager (n) V self (n) n*(ξ n*(ξ # of product lines, n 0 H ) L ) Remark: Delegation is crucial to fight decreasing returns. Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 30

Implications 1 Small firms do not hire outside managers. Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 31

Implications 1 Small firms do not hire outside managers. 2 Entrepreneurs with larger time endowments (larger families) are less likely to hire managers. Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 31

Implications 1 Small firms do not hire outside managers. 2 Entrepreneurs with larger time endowments (larger families) are less likely to hire managers. 3 In better contractual environments (stronger rule of law), firms are more likely to hire managers. Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 31

Implications 1 Small firms do not hire outside managers. 2 Entrepreneurs with larger time endowments (larger families) are less likely to hire managers. 3 In better contractual environments (stronger rule of law), firms are more likely to hire managers. 4 The correlation between firm size and family size is weaker when the contractual environment is stronger. Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 31

Implications 1 Small firms do not hire outside managers. 2 Entrepreneurs with larger time endowments (larger families) are less likely to hire managers. 3 In better contractual environments (stronger rule of law), firms are more likely to hire managers. 4 The correlation between firm size and family size is weaker when the contractual environment is stronger. 5 Firm growth and size relationship is negative, more so when the rule of law gets weaker. Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 31

Qualitative Evidence Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 32

Qualitative Evidence (Manager>0) 0.1.2.3.4 -.5 0.5 1 1.5 Employment Prediction: Small firms are less likely to hire outside managers. Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 33

Qualitative Evidence (Manager>0) -.02 -.01 0.01.02-2 -1.5-1 -.5 0.5 1 1.5 Family Size Prediction: Entrepreneurs with larger families are less likely to hire managers. Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 33

Qualitative Evidence (Manager>0) -.005 0.005.01.015.02 -.2 -.15 -.1 -.05 0.05.1.15 Trust Prediction: In better contractual environments, firms are more likely to hire managers. Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 33

Qualitative Evidence Employment -1.5-1 -.5 0.5-2 -1.5-1 -.5 0.5 1 1.5 Family Size High-trust region Low-trust region Prediction: The correlation between firm size and family size is weaker when the contractual environment is stronger. Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 33

Qualitative Evidence Growth of Employment -2-1 0 1 2 0 2 4 6 8 Employment Low-trust region High-trust region Prediction: Firm growth and size relationship is negative, more so when the rule of law gets weaker. Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 33

Role of Delegation How important is the lack of delegation quantitatively? Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 34

Role of Delegation How important is the lack of delegation quantitatively? How would have the Indian firms behaved if they faced US-level of delegation benefit? Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 34

Role of Delegation How important is the lack of delegation quantitatively? How would have the Indian firms behaved if they faced US-level of delegation benefit? Estimate the parameters of the model, especially ξ us and ξ india, using firm-level data from India and the US. Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 34

Calibration Parameter India Value US Value ξ benefit of delegation 0.02 0.41 α share of high type 0.03 0.22 Table: PARAMETER CALIBRATION FOR INDIAN FIRMS Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 35

Mean Employment Implications for the life-cycle Figure: LIFE CYCLE OF US FIRMS 5 4.5 Data Model 4 3.5 3 2.5 2 1.5 1 0-5 6-10 11-15 16-20 21-25 +26 Age Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 36

Mean Employment Implications for the life-cycle Figure: LIFE CYCLE OF INDIAN FIRMS 5 4.5 Data Model 4 3.5 3 2.5 2 1.5 1 0-5 6-10 11-15 16-20 21-25 +26 Age Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 37

Share of Small Firms Selection in India (1) Figure: SHARE OF SMALL FIRMS, DATA & MODEL 1 0.8 0.6 0.4 0.2 India - Data India - Model US - Data US - Model 0-5 6-10 11-15 16-20 21-25 26+ Age Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 38

Share of High-Type Firms Selection in India (2) Figure: SHARE OF HIGH-TYPE FIRMS IN INDIA (MODEL) 1 India 0.8 0.6 0.4 0.2 0 0-1 2-3 4-5 6-10 11-15 16-20 21-25 26-30 31-35 36-40 Age Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 39

Share of High-Type Firms Selection in India (2) Figure: SHARE OF HIGH-TYPE FIRMS IN INDIA (MODEL) 1 India US 0.8 0.6 0.4 0.2 0 0-1 2-3 4-5 6-10 11-15 16-20 21-25 26-30 31-35 36-40 Age Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 39

Share of High-Type Firms Selection in India (2) Figure: SHARE OF HIGH-TYPE FIRMS IN INDIA (MODEL) 1 India US US w/ India, 0.8 0.6 0.4 0.2 0 0-1 2-3 4-5 6-10 11-15 16-20 21-25 26-30 31-35 36-40 Age Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 39

Isolating the Importance of Delegation How much of this difference comes from ξ US vs ξ IND? 1 Give ξ US to the Indian firms, 2 Give ξ IND to the US firms. Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 40

Mean Employment Indian Firms with ξ US Figure: LIFE CYCLE IN INDIA, US AND INDIA WITH ξ US (MODEL) 5 4.5 India US 4 3.5 3 2.5 2 1.5 1 0-5 6-10 11-15 16-20 21-25 +26 Age Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 41

Mean Employment Indian Firms with ξ US Figure: LIFE CYCLE IN INDIA, US AND INDIA WITH ξ US (MODEL) 5 4.5 India US India w/ US 9 4 3.5 3 2.5 2 1.5 1 0-5 6-10 11-15 16-20 21-25 +26 Age Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 41

Indian Firms with ξ US Figure: LIFE CYCLE IN INDIA, US AND INDIA WITH ξ US (MODEL) 5 4.5 India US India w/ US 4 3.5 Mean Employment 3 2.5 2 1.5 1 Closes the gap, on average, by 50%! 0-5 6-10 11-15 16-20 21-25 +26 Age Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 41

Mean Employment US Firms with ξ IND Figure: LIFE CYCLE IN INDIA, US AND US WITH ξ IND (MODEL) 5 4.5 India US 4 3.5 3 2.5 2 1.5 1 0-5 6-10 11-15 16-20 21-25 +26 Age Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 42

Mean Employment US Firms with ξ IND Figure: LIFE CYCLE IN INDIA, US AND US WITH ξ IND (MODEL) 5 4.5 India US US w/ India 9 4 3.5 3 2.5 2 1.5 1 0-5 6-10 11-15 16-20 21-25 +26 Age Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 42

US Firms with ξ IND Figure: LIFE CYCLE IN INDIA, US AND US WITH ξ IND (MODEL) 5 4.5 India US US w/ India 4 3.5 Mean Employment 3 2.5 2 1.5 1 0-5 6-10 11-15 16-20 21-25 +26 Age Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 42

Decomposing Delegation Benefits ξ Try to decompose delegation benefit ξ into: Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 43

Decomposing Delegation Benefits ξ Try to decompose delegation benefit ξ into: rule of law Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 43

Decomposing Delegation Benefits ξ Try to decompose delegation benefit ξ into: rule of law human capital Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 43

Decomposing Delegation Benefits ξ Try to decompose delegation benefit ξ into: rule of law human capital financial development Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 43

Decomposing Delegation Benefits ξ Try to decompose delegation benefit ξ into: rule of law human capital financial development Accounting exercise using ξ c = β 0 + β 1 ROL c + β 2 HC c + β 3 FinDev c + φ ln(y) + ɛ c Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 43

Mean Employment Decomposing the US life-cycle 4 US(Fitted 9) US w/ India Fitted 9 3 2 1 0-5 6-10 11-15 16-20 21-25 +26 Age Institution-Age 6-10 11-15 16-20 21-25 26+ Rule of Law 30% 31% 29% 28% 27% Human Capital 40% 38% 41% 38% 38% Financial Development 15% 14% 15% 17% 16% Rest 15% 17% 15% 17% 19% Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 44

Mean Employment Decomposing the US life-cycle 4 US(Fitted 9) US w/ India Fitted 9 US w/ India ROL 3 2 1 0-5 6-10 11-15 16-20 21-25 +26 Age Institution-Age 6-10 11-15 16-20 21-25 26+ Rule of Law 30% 31% 29% 28% 27% Human Capital 40% 38% 41% 38% 38% Financial Development 15% 14% 15% 17% 16% Rest 15% 17% 15% 17% 19% Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 44

Mean Employment Decomposing the US life-cycle 4 US(Fitted 9) US w/ India Fitted 9 US w/ India ROL US w/ India ROL + HC 3 2 1 0-5 6-10 11-15 16-20 21-25 +26 Age Institution-Age 6-10 11-15 16-20 21-25 26+ Rule of Law 30% 31% 29% 28% 27% Human Capital 40% 38% 41% 38% 38% Financial Development 15% 14% 15% 17% 16% Rest 15% 17% 15% 17% 19% Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 44

Mean Employment Decomposing the US life-cycle 4 US(Fitted 9) US w/ India Fitted 9 US w/ India ROL US w/ India ROL + HC US w/ India ROL + HC + PC 3 2 1 0-5 6-10 11-15 16-20 21-25 +26 Age Institution-Age 6-10 11-15 16-20 21-25 26+ Rule of Law 30% 31% 29% 28% 27% Human Capital 40% 38% 41% 38% 38% Financial Development 15% 14% 15% 17% 16% Rest 15% 17% 15% 17% 19% Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 44

Mean Employment Decomposing the US life-cycle 4 US(Fitted 9) US w/ India Fitted 9 US w/ India ROL US w/ India ROL + HC US w/ India ROL + HC + PC 3 2 1 0-5 6-10 11-15 16-20 21-25 +26 Age Institution-Age 6-10 11-15 16-20 21-25 26+ Rule of Law 30% 31% 29% 28% 27% Human Capital 40% 38% 41% 38% 38% Financial Development 15% 14% 15% 17% 16% Rest 15% 17% 15% 17% 19% Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 44

Conclusions Firm selection and factor reallocation are key for economic growth yet they don t happen in developing countries. Not everybody is destined to be a good entrepreneur. (Right allocation of microcredits?) Credit constraints and size-dependent distortions are (I am sure) important. Yet there is something else that is fundamentally missing in developing countries. Tranformative entrepreneurs need a good playground with strong rule of law and trust. Ufuk Akcigit (U of Chicago and NBER) Firm Dynamics in Developing Countries July 10, 2015 45